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Utility Week 5th June 2015

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UTILITY WEEK | 5TH - 11TH JUNE 2015 | 17 Policy & Regulation Analysis Will milestones keep companies on course? A s the 2017 deadline looms ever larger, the ques- tion of who will keep the companies on course is becoming heated. At a private discussion held by Utility Week in association with CGI to mark the launch of our Countdown to Competition report, there was lively discussion of the sector's approach to assurance – and two distinct schools of thought emerged. One view is that the regulator should stand back and effectively allow the companies to monitor their own progress. This self-assurance programme is the current approach, and is in line with Ofwat's broader strategy of increasingly allowing the companies to set their own route to an agreed destination, getting away from the regulatory "tick box" culture. Proponents of this view argue that the companies know where they need to get to, and by when, and should be le to get on with it. Anything else, they say, would be regressive. The alternative view is that the market opening will only work if every company is ready on time, and Ofwat thus has a responsibility to the companies en masse to ensure they are all reaching the required milestones. Otherwise, companies that have invested significant time and money in meeting the deadline could find the pro- ject undermined by peers that have failed to do so. A more intrusive approach need not mean a return to old-style regulation, argued proponents of this view, but rather a set of agreed milestones. Companies will then have to demonstrate to the regulator that they have met those milestones at agreed times. An advantage of this approach, they argued, would be that if one company is falling behind, its peers could help it, in the interests of getting the market open on time. Ofwat currently favours the former approach, though it remains to be seen whether influential advocates of the latter will change the regulator's mind over the next few months. Those who want a stronger assurance programme were pleased to see Ofwat promise to establish a series of independent gateway reviews of the Open Water pro- gramme, though the details of these reviews and the launch of the first have yet to be announced. Another area for discussion was whether it would be better to allow the market to open a little late, but in full working order; or to open on time, even if some elements were not quite finished. No doubt this is a conversation that will become more pressing as the deadline approaches. But while there was some disagreement around the table, one thing was clear: the companies, and indeed the entire sector, are committed to getting the market open in the quickest and most effective way possible – whatever that may be. Ellen Bennett considers two potential approaches to ensuring market opening stays on track. viewee said: "It's unlikely to be a loss-making business… you can continue for maybe many years, losing a small amount of customers and not necessarily replacing them." Governance The governance process around market opening has suffered significant confusion and delays. One interviewee described it as "a tortuous dog's dinner". The trouble began in summer 2014 when the Treasury defied expectations by refus- ing to classify Open Water Markets Limited (OWML) as a private body. Ofwat has estab- lished OWML as an arm's-length organisa- tion to run the market opening on its behalf. The Treasury's decision was completely unexpected and forced a lengthy rethink that had several false starts. Work continued in the background, with the co-operation of the companies and leadership from individuals in Ofwat and Wics, notably Alan Sutherland, chief executive of Wics. Indeed, a plan to appoint Wics as the formal delivery partner was abandoned early this year aer the Scot- tish regulator's board vetoed the move. In February this year, Ofwat set out what it promises will be the final blueprint for the governance of the market. It will be run directly by the regulator, with the appoint- ment of a new market reform director, Adam Cooper, reporting to chief regulation officer Sonia Brown. The procurement of the system operator, a crucial step, is now under way under the auspices of Market Operator Ser- vices Limited (MOSL), a private sector com- pany set up by United Utilities, Anglian Water and Northumbrian Water, and with the sup- port of the industry. It is likely that MOSL will become the market operator in due course. Interviewees agreed the market had not got off to a good start. One said: "We're still at the point where we don't really know who's going to do what by when. To me there are too many entities involved here but because of the vagaries of public procurement, necessarily another entity, MOSL, has got involved in pro- curing some of the systems." However, interviewees were careful to emphasise the progress that has been made. There was broad agreement that the new arrangements are the right (or only) option at this stage, and a unanimous will to work together to get the market open on time. As one interviewee said: "Whatever the issues, it isn't the Treasury that's going to take the blame if it doesn't work. It will fall back on the industry and on the companies." Challenges Governance is the key chal- lenge, according to interview- ees. "The major challenge is the uncertainty around some of the central rules," said one. Also, some definitions remain unclear – "what's going to be in the competitive box and what isn't". Opening the market on time. Some respondents were more hopeful than others: "I think it will open on time. A few months ago I would have said it was a low chance but I think there's a real de- termination to get it to open on time." Getting the culture right. Some interviewees said ensuring compliance throughout their organisa- tions would be a challenge. In a similar vein, another mentioned getting to grips with a retail culture . Opportunities For most companies, market opening does not represent a great money-making oppor- tunity. However, interview- ees were excited, to varying degrees, about the soer opportunities presented by market opening, centring on culture and innovation. Getting the market open on time is seen as an opportu- nity for the industry to prove itself, and shake off its anti- reform reputation. One in- terviewee said: "There is the opportunity to demonstrate that the industry is innova- tive and up for a change." Market opening is driv- ing internal change. One interviewee declared that the business had become "sharper, more focused" as a result of the reorganisation. Brought to you in association with Download the full report at www.utilityweek.co.uk/downloads

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